The modest size of a standard hotel room at MGM Cotai relative to market rivals could remain a drag on the efforts of management to ramp up casino business among premium customers at MGM China Holdings Ltd’s latest Macau resort, according to Australian investment bank Macquarie Capital Ltd.
The institution said so in a detailed report on the Macau market issued on Monday, initiating coverage on the stocks of the six Macau gaming licensees.
MGM Cotai, which opened in February last year and cost US$3.5 billion, according to the promoters, “may be too base mass-centric, and given limited cross-play/traffic on Cotai versus the peninsula, the property’s core room sizes may not attract enough quality overnight guests needed to quickly ramp EBITDA.” So said a Macquarie research team led by Hong Kong-based analyst Edward Engel. It was referring latterly to earnings before interest, taxation, depreciation and amortisation.
The bank cited data supplied by Macau’s six casino operators and proprietary research, indicating that among Macau’s large-scale luxury hotels at casino resorts, the “standard” room size at MGM Cotai was 43 square metres (463 sq. feet).
Macquarie said that within an 18-strong cohort of hotels at Cotai casino resorts, only five of them had smaller standard rooms than MGM Cotai. They were: Sheraton Grand Macao Hotel and Holiday Inn Macao – both at Sands Cotai Central; The Parisian Macao, a property also controlled by Sands China Ltd; Galaxy Hotel within the Galaxy Macau resort run by Galaxy Entertainment Group Ltd; and Studio City, a mass market-focused Cotai property majority owned by Melco Resorts and Entertainment Ltd.
Macquarie’s Mr Engel and his colleagues added, regarding the market appeal of MGM Cotai: “That could make it difficult to compete for premium mass customers in a highly-competitive Cotai market. Rather, we wouldn’t be surprised if MGM [China] announced an investment programme that increases the number of suites at the property.”
Grant Bowie, chief executive of MGM China, hinted – in comments to GGRAsia following the extension until 2022 of MGM China’s Macau gaming sub-concession – at further investment in Macau.
Brokerage Sanford C. Bernstein Ltd had said in a January 2018 memo that the Parisian Macao was “reducing its room inventory by creating more suite product,” following what the institution had described as “disappointing” business ramp up at that resort, which opened in September 2016.
Sanford Bernstein had added at the time that the “Parisian room reduction and suite expansion should be fully completed by end of 2019”.
Macquarie stated in its Macau report issued on Monday, regarding MGM Cotai: “We expect a slow ramp more similar to Melco’s Studio City in 2016, which puts 2019 expectations at risk and drives our bearish outlook.”
Macquarie forecast approximately US$240-million in MGM Cotai property EBITDA for 2019, “well below” some United States-based brokerage forecasts of circa US$270 million.
Jefferies also initiates coverage
U.S.-based investment bank Jefferies LLC, which also initiated coverage of Macau names in a Monday report, was relatively upbeat on the ramp-up prospects for MGM Cotai, but still had some notes of caution.
“MGM Cotai initially disappointed after opening in early February 2018 but we believe the company has turned around with ongoing ramp-up and tweaking the business model,” stated Hong Kong-based analysts Andrew Lee and Lois Zhou in their report.
They added: “We expect MGM Cotai’s VIP segment to gain market share, albeit from a low base, and earnings to also benefit from additional gaming tables this year.”
Jefferies added: “Despite the MGM Cotai earnings turnaround, our earnings are below consensus. We are already forecasting MGM Cotai EBITDA increasing 189 percent to HKD2.4 billion [US$306 million]…” The commentary, referring to 2019, did not clarify if the figure was for adjusted or unadjusted EBITDA.
Macquarie recognised the work already being done by MGM China management to upgrade MGM Cotai’s product offer for premium customers.
“MGM Cotai’s recent additions of The Mansion suites should improve both VIP and premium mass performance,” stated the Australian bank.
But is also noted: “The property’s core rooms are slightly smaller than at other premium mass-targeted properties.”
Some Mansion villas opened at MGM Cotai in late March, according to James Murren, chairman of United States-based MGM Resorts International, parent of MGM China.
Prior to Mr Murren’s announcement, MGM China’s Mr Bowie had told GGRAsia that not all the Mansion villas at MGM Cotai would open in one go; but such openings would be done “progressively” in the “next few months”.
A Macau junket investment group had told GGRAsia – prior to the announcement of Mansion villas opening at MGM Cotai – that the VIP brand had feedback from clients saying they preferred larger rooms than had been on offer at MGM Cotai.
According to information released by MGM China last year, there will be 27 Mansion villas at MGM Cotai. At the sister property MGM Macau on the city’s peninsula, villa accommodation ranges in size from 220 square metres (2,368 sq. feet) to 380 sq. ms.
Jefferies also mentioned the effort to improve the MGM Cotai product offer for upmarket customers.
“We believe MGM Cotai’s ongoing opening of new facilities (such as opening of VIP rooms and Mansion hotel rooms for premium mass) and slightly differentiated service offering is likely to lead to turnaround,” stated analysts Mr Lee and Ms Zhou.
